CAPITAL MARKETS (FIN 1107)

MIDTERM EXAMINATION (A.Y. 2022-2023, 1st Semester)

I. COMPUTATION: Show the formula used and the solution to arrive at the final answer. The
total corresponding points per item is indicated in parenthesis.

1. If a mutual fund has $165 million in assets, $10 million in accrued liabilities and 2.5
million shares outstanding, what is the net asset value (NAV) of a share? (2 pts.)

2. You purchase a mutual fund for $17.23. The fund’s NAV is $17.00. (The load fee was
$0.23.) The NAV subsequently rises to $21.56 and you redeem the shares. What is the
percentage return on your investment? (3 pts.)

3. You purchase a no-load mutual fund for its NAV of $17.00. The fund distributes $2.13 per
share and the NAV rises to $21.56 at which time you redeem the shares. What is the
percentage return on your investment? (3 pts.)

4. A mutual fund generates a 10.8% return. During the same period, the market rose by
8.8%. If the risk-free rate was 2% and the fund had a beta of 1.2, did the fund outperform
the market? (10 pts.)

5. A mutual fund generates a 10.8% return. During the same period, the market rose by
8.8% and the risk-free rate was 2%. The standard deviations of the market return and the
fund’s return were 20% and 25%, respectively. The fund’s beta was 1.2. Did the fund
outperform the market based on the Sharpe and Treynor indexes? (12 pts.)

II. ANALYSIS AND APPLICATION: Answer the following essay questions concisely. The total
corresponding points per item is indicated in parenthesis.

1. Find a recent practical article online that describes a real-world example regarding a
specific financial institution or financial market that reinforces one or more concepts
discussed before the midterm exam.

Use the following search terms and be sure to include the prevailing year as a search term
to ensure that the online articles are recent:

a. Secondary market and liquidity

b. Money market
c. Bond offering
d. Stock offering
e. Valuation and stock
(10 pts.)
2. Given your knowledge of how interest rates are influenced by various factors reflecting
the demand for funds and the supply of funds available in the credit markets, write a short
essay to explain how and why interest rates will change over the next 3 months. (10 pts.)

3. Like many other investors, you are a ‘Fed watcher’ who constantly monitors any actions
taken by the Bangko Sentral ng Pilipinas (BSP) to revise monetary policy. You believe that
3 key factors affect interest rates.

Assume that the most important factor is the BSP monetary policy. The second most
important factor is the state of the economy, which influences the demand for loanable
funds. The third factor is the level of inflation, which also influences the demand for
loanable funds.

Because monetary policy can affect interest rates, it affects economic growth as well. By
controlling monetary policy, the BSP influences the prices of all types of securities.

Read the article in the following link on the latest policy direction of the BSP regarding
the oil price hike and inflation: https://businessmirror.com.ph/2022/10/26/bsp-to-do-
whatever-it-takes-to-rein-in-inflation/

You believe that the current events will cause much higher oil prices in the Philippines
and a weaker economy in the near future. You plan to determine whether the BSP will
respond to the economic problems that are likely to develop.

You have reviewed previous economic slowdowns caused by a decline in the aggregate
demand for goods and services and found that each slowdown precipitated a stimulative
policy by the BSP. Inflation was 7% or less in each of the previous economic slowdowns.
In the US, interest rates generally decline in response to these policies and the US
economy generally improved.

Assume that the BSP’s philosophy regarding monetary policy is to maintain economic
growth and low inflation. There appears to be a major fiscal policy change forthcoming
that will have a major effect on the Philippine economy. In consequence, the future
economy is up to the BSP.

You believe that the economy is headed towards a recession unless the BSP adopts a very
stimulative monetary policy, i.e. a 5% annual growth rate in the monetary supply. The
general consensus of economists is that the BSP will revise its monetary policy to
stimulate the economy for 3 reasons:

(1) It recognizes the potential costs of higher unemployment if a recession occurs,

(2) It has consistently used a stimulative policy in the past to prevent recessions, and
(3) The administration has been pressuring the BSP to use a stimulative monetary policy.

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 Although you will consider the economists’ opinions, you plan to make your own
assessment of the BSP’s future policy.

3.1. Do you think that the BSP will use a stimulative monetary policy at this point?
Explain. (15 pts.)

3.2. You maintain a large portfolio of bonds. You believe that if the BSP does not revise
its monetary policy, the Philippine economy will continue to decline at an
alarming rate. If the BSP stimulates the economy at this point, you believe that
you would be better off with stocks than bonds.

Based on this information, do you think you should switch to stocks? Explain. (15
pts.)

4. In an underwriting, what role does each of the following play?

4.1. Investment banker

4.2. Underwriter
4.3. Syndicate
4.4. Preliminary and final prospectus
4.5. Securities and Exchange Commission
(10 pts.)

5. You may find information on pending IPOs at sites such as PSE Edge
(https://edge.pse.com.ph/companyDirectory/form.do). Go to a calendar of new offerings
and select a company that just went public or is just about to go public. Provide the
pertinent details of the chosen company, the parties involved in the transaction/s and the
offering/s.

Did the price of the stock increase by more than 10% after 1 day, 1 week or 1 month? If
no stocks were going public when you visited the site, what may explain the inactivity?
(10 pts.)

*** Good luck! ***

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